The End of the New Deal Order

It won’t win the future.

Matthew Continetti

September 5, 2011, Vol. 16, No. 47

The reporter went to the City of Light in the summer of 1925. He found himself in the capital of a nation at the height of its military, economic, and cultural power. The continental empires that had been threats to France—Germany, the Hapsburgs, Russia—were smoldering wrecks. France’s economy seemed to have recovered from the destruction of the First World War. Modern culture flourished in the city. A visit to the Left Bank brought encounters with writers, artists, and philosophers; with the giants of the French avant-garde; with bankers, newspapermen, and politicians fluent in literary debate.

The reporter was struck by the equanimity of his surroundings. “The country was prosperous,” he wrote, “the people relaxed, the Continent at last at peace.” What the young William L. Shirer did not understand at the time, though, was that the apparent wealth and order rested on weak foundations. Part of the problem was demographic: The French population was shrinking. Birthrates had been falling before the war and continued to plunge after it ended. More than a million Frenchmen were permanently disabled from injuries in battle. Average family size had withered. Mass immigration alone “enabled the country to function.”

Inflation, meanwhile, was robbing the franc of its purchasing power. A franc in 1939 would be worth only one-seventieth of its value in 1913. The rising cost of living made it difficult for families and businesses to plan. Taxes were indirect, inefficient, and regressive. Government finances were a mess. Cronyism was rampant.

Politics was a font of instability. Since 1871 France had been a democracy, the Third Republic. Defenders of the liberal regime were besieged by ultranationalists on the right and Popular Front socialists on the left. “Governments rose and fell with dizzy rapidity,” wrote Shirer, “some lasting but a few months, the most durable of them but two or three years.” The turbulence and polarization led to widespread cynicism. The attitude of the day was Je m’en foutisme—not giving a damn.

Reality finds ways to dispel illusions. By the time Shirer left Paris in the fall of 1938, the Third Republic was in disarray, “its strength gradually sapped by dissension and division, by an incomprehensible blindness in foreign, domestic, and military policy, by the ineptness of its leaders, the corruption of its press, and by a feeling of growing confusion, hopelessness, and cynicism.” The global economy was in depression. Another war was just around the bend.

The Third Republic proved incapable of dealing with the crises of its time. Its elites were too self-absorbed, its society too fractured, its culture too decadent to oppose the threats arrayed against France. The nation’s military defenses quickly fell apart when the Nazis invaded in May 1940. “Public discipline and order disappeared,” Soviet ambassador to London Ivan Maisky recalled in his memoirs. “A great country, with so many centuries of glorious history behind it, was seized with political, military, and psychological paralysis.”

The Wehrmacht entered Paris on June 14, 1940. William Shirer returned to the city several days later. The glorious metropolis, now occupied by foreign soldiers, seemed to him cold, lifeless, abandoned. Millions of refugees were fleeing southward and westward. The French Army was defeated. The secretary of war, Charles de Gaulle, had fled to England.

On July 10 the National Assembly voted to establish the Nazi puppet state of Vichy, ruled by Marshal Pétain and Pierre Laval. The Third Republic was gone.

By the standards of modern France, the American government has been remarkably stable. Since the Declaration of Independence in 1776, by which the American people assumed our “separate and equal station” among the powers of the world, we have lived under just two constitutions: the short-lived Articles of Confederation from 1781 to 1789, and the U.S. Constitution ever since. No enumerated “republics” for us. No lurching from democracy to anarchy to tyranny and back. No foreign invasion and usurpation. Only one (incredibly bloody) civil war has been fought—to uphold the Constitution and vindicate the principles of the Declaration. Nothing like the fall of the Third Republic has happened here.

Or at least not overtly. What has changed is the American people’s conception of the ends of government—and the powers we bestow on government to pursue those ends. Historians have characterized these shifts in attitudes toward and expectations of government in various ways. In his 2007 book America’s Three Regimes, for example, historian Morton Keller argued that our country actually has lived under three distinct types of polity: from the colonial era to the 1820s; from Old Hickory to the New Deal; and from FDR to today. The transition from one stage to the next has nowhere been as sudden as the fall of the French Third Republic. But deep transformations occurred nonetheless. And there is no reason to believe the process of change has come to an end.

In the first era, the Pilgrims and Cavaliers brought from England to the New World attitudes toward authority and power that were courteous and obedient. Religion was fundamental. Civic order depended on a robust morality. It was from this culture that a uniquely American form of republican politics came into being. The Founders believed man was born free and equal, with certain inalienable rights given to him by God. Men formed governments based on contract and consent to preserve the rights that they possessed as individuals in the state of nature. Having violated the contract, King George gave the colonists no choice but to resort to their natural right of revolution.

The function of republican politics in an independent America was to thwart ambition, caprice, and passion and allow the “cool and deliberate sense of the community” to prevail. But this was easier said than done. Once George Washington exited the scene, the Founders wasted no time dividing into the factions that developed into America’s two political parties. Then, as the franchise was extended to the small planters and settlers in the west, as an innovative market economy took shape, as the young nation expanded, the American view of government shifted.

During this second period, parties—eventually the Democratic and Republican parties—flourished as national political institutions. Poor whites, blacks, and women eventually secured their rights under the law. The U.S. military was small, except during the Civil War, and was deployed mainly in North America.

From the time of Jackson to the time of FDR, Americans tended to look at the distant central government with wary eyes. Federal authorities had little sway over the economy. Civil administration was minuscule. “The American state,” Keller writes, “was one not of bureaucrats and armies but of parties and courts.”

The U.S. population swelled. The Union stretched from the Atlantic to the Pacific and beyond. Plentiful natural resources, strict enforcement of property rights, and sound money contributed to the rise of American industry. Political clout was transferred from the country farmer to the city machine. The trusts commanded huge sums of capital and influence.

But it was not to last. The nineteenth-century conception of American government survived the challenges posed by the Civil War, Reconstruction, and the agrarian and Populist revolts. In the early decades of the twentieth century, traditionalists constrained the Progressive impulse and limited regulation to corporations, interstate commerce, and basic workplace and consumer safety.

Then the Great Depression, and the centralization that came with World War II and the Cold War, ushered in a new order—the one under which we live today.Franklin Roosevelt’s New Deal was the decisive break. FDR believed that changing conditions required the government to assume new means to achieve a rapidly multiplying set of ends. And this required nothing less than a redefinition of the American social contract. The earlier understanding was that government power should be limited to securing those rights we possessed, by nature, prior to the establishment of the state. What Roosevelt did was rearrange the terms: Where once individuals formed governments to protect their natural rights, now individuals bargained with governments over rights and benefits that evolve over time.

The modern welfare state was born. In our era, Keller writes, political debate isn’t over how to constrain government. It’s over how to use government “to enforce and enhance the rights of individuals and groups.” And by the time FDR delivered his Second Bill of Rights address in January 1944, the number of rights had mushroomed. Life, liberty, property, and conscience were just for starters. Equally pressing were “the right of every family to a decent home” and “the right to a good education” and the right to economic “security.”

Parties are no longer central to political life. Print and electronic media, grievance groups, social scientists, and activists define the terms of debate. Government relies on the judiciary and an alphabet soup of government agencies—FDR created 65 of them in his first two years alone—to determine, assign, and protect the steady stream of benefits coming from government. Nor was it only the domestic ambitions of Americans that increased: Global threats, first from the Axis, then from the Soviet Union, and most recently from Islamic terrorists required America to intervene throughout the world.

Only later would we come to understand that the house FDR built sits on a wobbly base. Steady economic growth is necessary to pay for all of the government’s promises. The bureaucracy functions only if experts have the confidence of the people. And government and citizenry must agree on a limiting principle that prevents national bankruptcy, a bloated state, and an irresponsible public.

Otherwise, the nation backs into a situation where government has promised far more than it can afford; where the dollars coming into the Treasury are spent entirely on satisfying creditors; where public institutions and leaders are denigrated; where the future is frightening; where snark is the dominant mode of public discourse; where menace grows overseas without check; and where voters lurch from one party to another, desperate for a way out.

The nation, in other words, would back into precisely the situation where we find ourselves today.

Imagine a foreign journalist arriving in Washington, D.C., on New Year’s Day 1998. He, like Shirer in 1925, would have been visiting the capital of a global power in the midst of a golden age. Having won the Cold War, America was at peace. It was the “indispensable nation.” With the takeoff of the Internet, the economy was booming. The approaching millennium brought technological progress and optimism about the future. American culture, for better or worse, permeated a unipolar world.

Within weeks of his arrival, though, our journalist began to observe an incredible train of events. Over the next 12 years he would watch as America experienced its first presidential impeachment since 1868, the most controversial presidential election since 1876, the deadliest terrorist attack in our nation’s history and worst attack on American soil since 1941, and the largest financial crisis and deepest recession since the 1930s.

He watched as the American military toppled regimes in Afghanistan and Iraq in a matter of weeks, only to spend years of conflict in those bloody lands. He watched as the federal budget relapsed from surplus to jaw-dropping deficit, as debts piled up and threatened to suffocate the economy, as American bonds lost their AAA rating for the first time ever.

He watched the promise of his first days in this country evaporate. A series of bubbles burst before his very eyes: the tech bubble, the mortgage bubble, the sovereign debt bubble. The churn and froth corroded Americans’ faith in institutional authority. The presidency seemed to hold few answers. Bill Clinton was a political adept but a moral lout. George W. Bush was a decent man, but he mismanaged the wars on which he staked his reputation. Barack Obama was debonair but clueless.

The political consequences were dramatic. The foreign journalist’s jaw would drop whenever he analyzed congressional election results. He couldn’t believe how American voters continually redrew the electoral map in such unpredictable ways. The 1998 midterm elections were the first since 1822 in which the nonpresidential party failed to gain seats in the sixth year of a president’s term. The 2002 midterms, on the other hand, were the first since 1934 in which the president’s party gained seats in the second year of his term.

The 2006 midterms saw the best performance for House Democrats since 1974, the lowest number of House Republican freshmen since 1911, and unified Democratic control of Congress for the first time in 12 years. But the Republicans came storming back in 2010, gaining more House seats than in any election since 1938, their largest share of the House popular vote since 1946, and more seats in state legislatures than in any election since 1928. There was a growing sense that yet another wave election would crash into the nation’s capital in 2012. The results were so bipolar that what the American public needed most, the journalist thought, was a dose of lithium.

By the time 2011 rolled around it was clear that America was experiencing fiscal, institutional, and spiritual crisis. No one could doubt any longer that the federal budget was unsustainable. Both Republicans and Democrats saw the projections from the Congressional Budget Office: Left alone, entitlement spending would drive the national debt to multiples of GDP under which no economy can function.

Both Republicans and Democrats read the headlines from Europe, where governments in Greece and Ireland were experiencing something like debt slavery, with depressed economies incapable of paying off creditors. Members of both parties understood that the European Union faced a choice between tighter fiscal and political integration and disintegration. They watched as neighborhoods of London and other English cities were convulsed in rioting. The impassioned and embittered fight over raising the debt ceiling left even President Obama aware that his presidency would be judged partly on whether he could tame government spending. Through all the kicking and screaming, it was increasingly apparent to anyone with eyes to see that the looming threat was national insolvency and the end of the dollar as the world’s reserve currency.

Even so, the debt was only one aspect of a larger problem that threatened to undermine the very premises of the welfare state: a collapse of confidence in the institutional structures of American life. FDR’s vision required capable managers to administer the rights and benefits government “accorded” to individuals. But such competence was being exposed as mythical. The Federal Reserve seemed impotent. The judiciary was aloof and ideologically riven. The U.N., NATO, the EU, and other multilateral organizations appeared to be anachronisms.

The regulatory arms of the federal government were dysfunctional. From the asleep-on-the-job FAA to the let’s-put-jobs-to-sleep NLRB, the bureaucracies worked at a remove from, and often at cross-purposes to, the everyday concerns of Americans. The country’s transportation and energy grids were in desperate need of maintenance. Congress was far more unpopular than the president.

Just as the examples of institutional failure were multiplying, however, the government gathered more power to itself. The dramatic consolidation of state power that began with Washington’s response to the financial crisis in late 2008 did not stop until the 2010 elections. And the elections only halted the expansion. They didn’t roll it back. The Supreme Court directed the EPA to regulate carbon emissions throughout the country. The Dodd-Frank financial bill gave regulators vast discretion over markets.

Obamacare handed the Department of Health and Human Services—and a bewildering array of new boards and commissions—one-sixth of the economy. The government used its financial stake in the auto industry to reshape the innards of your Chevy. AIG and Fannie and Freddie were kept on life support, apparently in perpetuity. Health care, finance, autos, housing, even diet—nothing seemed beyond Leviathan’s reach.

The furor over the health care overhaul’s individual insurance mandate underscored that this was, above all, a crisis over limits. If there was nothing to stop the government from compelling you to buy health insurance, what was to stop it from compelling you to wake up early for Obamarobics? The recognition that fundamental issues of governance were at stake only raised more questions. Was it possible for a new Congress—for any Congress—to claw back “mandatory” federal spending and debt? What exactly stood to prevent the EPA from riding roughshod over the economy? Just how much government was enough?

As Americans struggled for answers, many discerned a spiritual component to the crisis. Runaway spending and institutional decay could be seen as the symptoms of a national delusion that it is possible to get something for nothing. The government’s generous promises of pensions and health care—none of them truly paid for—bred a sense of entitlement among the citizenry. The idea that the good life could be had for free, that the government “owed” people certain material goods, became widespread.

Personal restraint and responsibility matter little when someone else is paying the bill. The eruption of public profligacy coincided with a gusher of consumer debt. And a government that shirked any notion of prudence, solvency, or humility was only fitting for a civil society plagued by irresponsibility, obesity, and exhibitionism.

The foreign journalist was fascinated when this turmoil brought new political coalitions to the fore. The liberals, led by President Obama, doubled down on the FDR model. They saw nothing fundamentally wrong with an increasingly large and active federal government that sought to reduce inequalities and smooth out the rough edges of the business cycle. Only with such a government, they said, can America “win the future” and “compete” in the twenty-first century against the Asian powers. And besides, they went on, the current arrangements worked pretty well: Never had humanity been in a better material condition than the present.

For the liberals, nothing intrinsic to the system had brought America to the edge of disaster. What was responsible for the morass was the irrational or malign behavior of political actors. What the journalist often heard from elites was a series of excuses. The American people don’t understand the good we’re trying to do, they said; these issues are difficult to comprehend. The journalist heard Obama lament the sad state of partisanship in Washington. He heard liberal pundits blame the situation on the “terrorist” ideologues behind the Tea Party. “The problem with American politics right now is Republican extremism,” wrote Paul Krugman in a recent column, “and if you’re not willing to say that, you’re helping make that problem worse.”

According to liberals, debt wasn’t necessarily a bad thing. “Every family knows that a little credit card debt is manageable,” President Obama said in his July 25, 2011, address to the nation. The fiscal crisis wasn’t the consequence of overspending. It had no moral component. It was simply the result of inadequate revenue to the Treasury. Increase taxes so that “millionaires and billionaires” are “paying their fair share,” Democratic leaders said, and you can get back to the business of spending public money to achieve social justice. A Washington, D.C., without petty bickering would coordinate effectively the diverse concerns of 300 million Americans. The United States would “catch up” to the European social democracies. Tom Friedman wouldn’t be embarrassed by his country.

On the other side were the populists who tried desperately to impose limits on the government. For the Tea Party, the New Deal order had run its course. There wasn’t any money left to pay the bills. The bureaucracies were dysfunctional. The judges had run amok. The debt threatened America’s future. Dependence on government was sapping the American soul.

For the populists, the intent of the Constitution was to restrict the range of government action. So the Tea Party sought a return to what it saw as the Founders’ understanding of politics. That meant coming to grips with the national debt and the annual deficits that fed it. But it also meant imposing constitutional barriers to profligacy, so America wouldn’t ever find herself at this place again.

The populists believed that constitutional remedies—a balanced budget amendment, term limits for Congress, a repeal of the Seventeenth Amendment to reassert state power in the Senate—would restore solvency to the country. That’s why they also liked the idea of a return to the gold standard: A fixed currency would prevent the Federal Reserve from financing deficit spending with digitized dollars.

The populists’ analysis seemed correct. But their impassioned radicalism also limited their appeal. The Tea Party too often let the perfect be the enemy of the good. They forgot that you cannot inculcate reverence for the Constitution with a snap of your fingers. Politicians of both parties, under Republican and Democratic presidents, had failed to balance the budget for decades; the surpluses of 1998-2000 had been a blip.

The debt ceiling fight illustrated these concerns. The public was deeply worried about the economy, the debt, and the direction of the country. But threatening default, or even a government shutdown, made the public if anything more anxious. The welfare state might be headed for a crash, but that was no reason to help tear it down.

What was needed was a course correction. The public must be weaned away from the entitlement mentality. But even as an earlier, more limited understanding of government’s purpose was recovered, it was also necessary to recognize a role for prudential and reasonable government—as well as a role for a responsible citizenry. Paul Ryan’s House Republican budget moved in this direction. Yet partisan Democrats, the defenders of the old order, predictably responded with the lie that Ryan would have “ended Medicare,” while many in the Tea Party opposed Ryan for not going far enough.

As a blueprint for the near term, though, the Ryan plan deserved to be taken seriously. Here was a realistic, gradual, detailed, defensible, and clear-eyed approach to reorienting government.

The next step was to wed the abstractions of actuarial tables to a moral critique of American politics and society, so that voters grasped the connection between reckless government and familial and institutional decay. Such a move might even provoke a search for—and rediscovery of—those first principles that informed the American Founding: that government exists not to give you stuff, but to protect the rights you possess by virtue of being alive.

When our imaginary foreign journalist left Washington last week, in between the earthquake and the hurricane, he brooded on the current impasse. America had taken more than a decade of blows to the belly. There was no end in sight. Left, right, and center were voicing doubt and criticism of President Obama. None of the contenders for the Republican presidential nomination seemed quite appropriate for the job. The country was on the verge of another recession, the debt continued to metastasize, Iran was arming. There was a widespread feeling that the old order was passing away.

That led him to reflect on the prospects of the American welfare state. He asked how it could possibly keep the promises it had made. He pondered how long a political system could function without the public trust. He meditated on the strengths and weaknesses of the New Deal order. And he wondered: What comes next?